Gov’t to Axe Complicated Regulations to Boost Oil & Gas Investment

President Joko “Jokowi” WidodoA�told the Ministry of Energy and Mineral Resources on Wednesday (02/05) to continue axing several complicated regulations in a bid to accelerate more petroleum investment into Indonesia.

“I told the [Energy Ministry] that our regulations are still not conducive. There are still [many regulations] that are complicated, and require a lot of procedure. The regulations should be axed and simplified. I want to discuss that at this forum, what kind of regulations that still give us a headache,” Jokowi said at the 2018 Indonesian Petroleum Association (IPA) conference at the Jakarta Convention Center on Wednesday.

“We expect to increase [oil and gas] production every year because it has been years that we have not been conducting large-scale oil exploration. Our production keeps declining, and we keep importing oil. That is the expectation,” Jokowi said.

Once a founding member of the Organization of the Petroleum Exporting Countries (OPEC), Indonesia is now only able to produce oil about 800,000 barrels per day (bpd), half of its daily need, and has since relinquished its place in OPEC.

At its peak in 1995, the country was able to produce more than 1.6 million bpd, thanks to massive investments from foreign oil giants.

However, an uncertain regulatory environment and a lack of new investments to find new reserves has turned Indonesia into a net oil importer. International firms such as ConocoPhillips and Chevron have reduced their holdings, and the nation’s overall crude output now stands well below 1 million bpd.

Private investment in the oil and gas sector slumped to a multi-year low of $9.3 billion in 2017, compared to a target of $13.8 billion, according to BMI Research.

The government has been making efforts to eliminate several regulations. According to the Energy and Mineral Resources Ministry, the number of required permits for firms in the oil and gas industry to conduct business has been reduced to only six from a previous 104.

Last year, the government introduced its gross split scheme for new oil and gas production sharing contracts, replacing the previous cost recovery scheme, which had been in use for more than 50 years.

Under the cost recovery scheme,A�profit sharing is calculated after contractors deduct production and exploration costs. That requires a lot ofA�supervisionA�and a complicated bureaucracy to avoid accounting mishaps.

Meanwhile, the gross split system is more of an upfront approach, based on the working area and the gross production. The contractor will cover all operation spending, while the government will receive its profit-sharing once per a month.

“By shifting the production sharing from a cost recovery scheme to the current gross split, it shows the government’s significant efforts to show flexibility in an bid to attract more investment,” said Indonesia Petroleum Association president Ronald Gunawan.

“It’s very clear that the Energy and Mineral Resources Ministry has received industry input and strengthened provisions to improve the competitiveness of this scheme,” Chevron IndoAsia business unit director Chuck Taylor said, referring to gross split contracts.

Indonesia announced four winners from five blocks in a direct offer tender on Wednesday, including Lion Energy and units of ENI and Repsol. Interest in Indonesia’s tenders has been tepid, though, and the industry has pointed to more attractive opportunities in other countries.

Investors have also criticized Jakarta’s decision to hand exploration and development rights on expiring oil blocks to Pertamina in compensation for its losses on government-set retail fuel prices.

Exploration

Jokowi slammed state-owned oil company Pertamina, whom he said had not been invested enough in exploration, stating that the firm has notA�conducted major oil exploration since 1970.

However, the president instructed his cabinet in March this year toA�keepA�fuel prices unchangedA�until the end of next year. That consequently shifted the subsidy burden to Pertamina, which is seeing its cost of importing fuel increase in line with rising global oil prices.

Jokowi issued several reforms in 2014 and 2015 shortly after taking office, when he decided to take the unpopular decision of cutting government fuel spending by more than 90 percentA�to fund infrastructure development across the archipelago.

That decision has served to hamper Pertamina’s performance. According to the Supreme Audit Agency (BPK), which reviewed the government’s financial report in 2016, the stateA�owesA�Pertamina about Rp 22 trillion ($1.57 billion) for subsidized fuel. Askolani, a director general of budgeting at the Ministry of Finance, said the government has set aside part of its budget to pay back half of its debt to Pertamina.

Pertamina Response

Pertamina senior vice president for upstream business development Denny Tampubolon said the company has been making efforts to conduct drilling exploration in Indonesia.

Denny said the exploration is done by conducting extensive geological surveys and drilling in high-risk wells, adding that oil discoveries are often limited because of mature wells.

“However, we are still trying to drill in those maturing wells as they potentially still have oil reserves.”

Pertamina will look to explore around 20 wells this year, up from 15 in 2017. The company’s oil and gas production rose to 693,000 boepd last year, a 7 percent increase from the year prior.

To boost production, the company has been exploring new wells across the archipelago, including in Tarakan, North Kalimantan, which may be able to produce 200 million boepd.